Corrected: Dartmouth, Brown lead Ivies in investing with trustees

BOSTON At Dartmouth College and Brown University, the old school tie might come with a silver lining.

Dartmouth and Brown - two of the eight Ivy League colleges and universities - lead the group in terms of investing their endowments with firms that have business ties to members of their boards of trustees, a review by Reuters of the Ivies' investment practices found.

In contrast, the endowments of the University of Pennsylvania, Harvard University and Yale University did not disclose any investments with firms that have ties to their trustees.

Dartmouth's endowment investment practices drew fire this week when the New Hampshire Attorney General's Office said it was reviewing allegations of mismanagement and conflicts of interest at Dartmouth College's $3.4 billion endowment.

The investigation was sparked by an anonymous letter alleging that the New Hampshire college's endowment steered business to investment firms like Apollo Global Management and Lone Pine Capital, which were run by members of the college's board of trustees and investment committee.

Across the United States, university investment policies vary widely.

A 2010 survey of the tax returns of 618 private colleges by the Chronicle of Higher Education found about 25 percent disclosed financial links to businesses related to trustees. Not all were money managers, as some listed ties to construction firms, real estate owners and other service providers.

The Chronicle also found that about 90 percent of schools had formal conflict of interest policies with regards to doing business with associated people and their companies.

The anonymous letter to the New Hampshire AG listed links to another half dozen firms, including Lone Pine Capital, a hedge fund run by Steve Mandel, chairman of Dartmouth's board of trustees.

Lone Pine did not return a call for comment.

Dartmouth, located in Hanover, New Hampshire, has denied any improper conduct. All investments were made before fund managers joined the board of trustees and were consistent with the school's conflict of interest policy, the college said.

GETTING THE GREEN LIGHT AT BROWN

At Brown, in Providence, Rhode Island, trustees had ties to at least half a dozen endowment money managers, including hedge funds Eton Park Capital and TPG Capital, according to the school's 2010 and 2009 tax filings.

"Enforcement of clear and relevant conflict of interest and commitment policies that identify and manage any real or potential conflicts is an ongoing process at Brown," spokeswoman Marisa Quinn said.

Brown actually prohibits investing in funds managed by any member of its investment committee, Quinn said. But she declined to disclose which of the trustees were on the committee.

In contrast, while the University of Pennsylvania counts hedge fund managers James Dinan, Daniel Och and Richard Perry among its long list of trustees, the school also has a tough policy on where it can invest its $6.6 billion endowment.

The Office of Investments is not permitted to put money with firms in which investment board members have an economic interest without top trustees signing off first. Such exemptions are extremely rare.

"We are fortunate to have such a wealth of talented alumni and find that we can enforce a strict conflict of interest policy without compromising on either board or investment quality," Penn's chief investment officer Kristin Gilbertson said in an email.

At Harvard and Yale, which run the two largest endowments in the country, investments with trustee-related firms are not prohibited, but appear virtually non-existent. Both schools declined to disclose their full list of outside investment firms.

"While we do not currently have Corporation members who manage money for the endowment, it is not something that we preclude by policy," Harvard spokesman John Longbrake said.

"Yale has a policy to properly manage any real or apparent conflicts of interest," Yale spokeswoman Karen Peart said.

WHEN DISCLOSURE FALLS SHORT

The other three Ivies - Columbia University, Princeton University and Cornell University - disclosed only one or two endowment investments with funds related to trustees. Columbia and Princeton said they had policies in place to prevent interested trustees from voting on such matters and ensuring arms-length dealings. Cornell did not return a call for comment.

Among other private schools with large endowments, the University of Chicago listed two funds with ties to trustees and the University of Notre Dame listed one. However, tax returns for Northwestern listed five related funds and Stanford University listed six.

Dartmouth's situation has also highlighted shortcomings of the current manner of disclosing potential conflicts only in annual tax returns. None of the eight Ivy League schools, when contacted by Reuters this week, provided any disclosure beyond what was in their annual tax filings, which are generally limited to transactions where money changed hands during a school's fiscal year.

"They disclose the absolute bare minimum and try to stonewall that this self-dealing is even taking place," said Todd Zywicki, a law professor at George Mason University. "These institutions should bend over backwards to provide transparency about these investments. They are called trustees for a reason."

Zywicki criticized Dartmouth's investment practices when he served as a trustee there from 2005 to 2009.

Even enhanced disclosure might not resolve the inherent conflicts of interest present in the transactions, according to Daniel Ariely, a pioneer in the field of behavioral economics.

Research on the financial services industry has found that disclosing conflicts of interest can free brokers and advisers to take even greater advantage of their clients than they would when conflicts are not disclosed.

"There is no way to handle conflicts of interest and the only way is to eliminate them - which they should do," said Ariely, who teaches at Duke University.

(This story is filed to correct 27th paragraph of May 31 story which erroneously described Daniel Ariely as a Nobel prize winner.)

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